10-Q 1 a2223235z10-q.htm 10-Q

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-Q

(Mark One)    

ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: January 31, 2015

Or

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                        to                         

Commission file number 1-4423



HEWLETT-PACKARD COMPANY
(Exact name of registrant as specified in its charter)

Delaware   94-1081436
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. employer
identification no.)

3000 Hanover Street, Palo Alto, California

 

94304
(Address of principal executive offices)   (Zip code)

(650) 857-1501
(Registrant's telephone number, including area code)



        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ý    No o

        Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ý    No o

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o
(Do not check if a smaller
reporting company)
  Smaller reporting company o

        Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    Yes o    No ý

        The number of shares of HP common stock outstanding as of February 28, 2015 was 1,817,558,730 shares.


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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Form 10-Q
For the Quarterly Period ended January 31, 2015
Table of Contents

Forward-Looking Statements

        This Quarterly Report on Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2 of Part I, contains forward-looking statements that involve risks, uncertainties and assumptions. If the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of Hewlett-Packard Company and its consolidated subsidiaries ("HP") may differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including but not limited to any projections of revenue, margins, expenses, effective tax rates, net earnings, net earnings per share, cash flows, benefit plan funding, share repurchases, currency exchange rates or other financial items; any projections of the amount, timing or impact of cost savings or restructuring charges; any statements of the plans, strategies and objectives of management for future operations, including the previously announced separation transaction and the future performances of the post-separation companies if the separation is completed, as well as the execution of restructuring plans and any resulting cost savings or revenue or profitability improvements; any statements concerning the expected development, performance, market share or competitive performance relating to products or services; any statements regarding current or future macroeconomic trends or events and the impact of those trends and events on HP and its financial performance; any statements regarding pending investigations, claims or disputes; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. Risks, uncertainties and assumptions include the need to address the many challenges facing HP's businesses; the competitive pressures faced by HP's businesses; risks associated with executing HP's strategy, including the planned separation transaction; the impact of macroeconomic and geopolitical trends and events; the need to manage third-party suppliers and the distribution of HP's products and the delivery of HP's services effectively; the protection of HP's intellectual property assets, including intellectual property licensed from third parties; risks associated with HP's international operations; the development and transition of new products and services and the enhancement of existing products and services to meet customer needs and respond to emerging technological trends; the execution and performance of contracts by HP and its suppliers, customers, clients and partners; the hiring and retention of key employees; integration and other risks associated with business combination and investment transactions; the execution, timing and results of the separation transaction or restructuring plans, including estimates and assumptions related to the cost (including any possible disruption of HP's business) and the anticipated benefits of

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implementing the separation transaction and restructuring plans; the resolution of pending investigations, claims and disputes; and other risks that are described herein, including but not limited to the items discussed in "Risk Factors" in Item 1A of Part II of this report and that are otherwise described or updated from time to time in HP's Securities and Exchange Commission reports. HP assumes no obligation and does not intend to update these forward-looking statements.

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Part I. Financial Information

ITEM 1.    Financial Statements and Supplementary Data.

Index

 
  Page

Consolidated Condensed Statements of Earnings for the three months ended January 31, 2015 and 2014 (Unaudited)

  5

Consolidated Condensed Statements of Comprehensive Income for the three months ended January 31, 2015 and 2014 (Unaudited)

 
6

Consolidated Condensed Balance Sheets as of January 31, 2015 (Unaudited) and as of October 31, 2014 (Audited)

 
7

Consolidated Condensed Statements of Cash Flows for the three months ended January 31, 2015 and 2014 (Unaudited)

 
8

Notes to Consolidated Condensed Financial Statements (Unaudited)

 
9

Note 1: Basis of Presentation

 
9

Note 2: Segment Information

 
10

Note 3: Restructuring

 
16

Note 4: Retirement and Post-Retirement Benefit Plans

 
17

Note 5: Stock-Based Compensation

 
18

Note 6: Taxes on Earnings

 
20

Note 7: Balance Sheet Details

 
23

Note 8: Financing Receivables and Operating Leases

 
25

Note 9: Goodwill and Intangible Assets

 
29

Note 10: Fair Value

 
30

Note 11: Financial Instruments

 
33

Note 12: Borrowings

 
40

Note 13: Stockholders' Equity

 
43

Note 14: Net Earnings Per Share

 
46

Note 15: Litigation and Contingencies

 
47

Note 16: Guarantees

 
58

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Consolidated Condensed Statements of Earnings

(Unaudited)

 
  Three months ended
January 31
 
 
  2015   2014  
 
  In millions, except
per share amounts

 

Net revenue:

             

Products

  $ 18,161   $ 18,770  

Services

    8,583     9,281  

Financing income

    95     103  

Total net revenue

    26,839     28,154  

Costs and expenses:

             

Cost of products

    14,075     14,525  

Cost of services

    6,433     7,139  

Financing interest

    63     72  

Research and development

    825     811  

Selling, general and administrative

    3,071     3,210  

Amortization of intangible assets

    222     283  

Restructuring charges

    146     114  

Acquisition-related charges

    4     3  

Separation costs

    80      

Total operating expenses

    24,919     26,157  

Earnings from operations

    1,920     1,997  

Interest and other, net

    (174 )   (163 )

Earnings before taxes

    1,746     1,834  

Provision for taxes

    (380 )   (409 )

Net earnings

  $ 1,366   $ 1,425  

Net earnings per share:

             

Basic

  $ 0.75   $ 0.75  

Diluted

  $ 0.73   $ 0.74  

Cash dividends declared per share

  $ 0.32   $ 0.29  

Weighted-average shares used to compute net earnings per share:

             

Basic

    1,833     1,907  

Diluted

    1,861     1,935  

   

The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Consolidated Condensed Statements of Comprehensive Income

(Unaudited)

 
  Three months
ended
January 31
 
 
  2015   2014  
 
  In millions
 

Net earnings

  $ 1,366   $ 1,425  

Other comprehensive income before taxes:

             

Change in unrealized gains (losses) on available-for-sale securities:

             

Unrealized gains (losses) arising during the period

    46     (1 )

Gains reclassified into earnings

        (1 )

    46     (2 )

Change in unrealized gains on cash flow hedges:

             

Unrealized gains arising during the period

    631     70  

(Gains) losses reclassified into earnings

    (334 )   109  

    297     179  

Change in unrealized components of defined benefit plans:

             

Amortization of actuarial loss and prior service benefit

    112     63  

Curtailments, settlements and other

    (2 )    

    110     63  

Change in cumulative translation adjustment

    (68 )   (24 )

Other comprehensive income before taxes

    385     216  

Provision for taxes

    (179 )   (105 )

Other comprehensive income, net of taxes

    206     111  

Comprehensive income

  $ 1,572   $ 1,536  

   

The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Consolidated Condensed Balance Sheets

 
  As of  
 
  January 31,
2015
  October 31,
2014
 
 
  In millions, except par value
 
 
  (Unaudited)
   
 

ASSETS

             

Current assets:

             

Cash and cash equivalents

  $ 12,919   $ 15,133  

Accounts receivable

    12,295     13,832  

Financing receivables

    2,907     2,946  

Inventory

    6,575     6,415  

Other current assets

    13,502     11,819  

Total current assets

    48,198     50,145  

Property, plant and equipment

    11,030     11,340  

Long-term financing receivables and other assets

    8,619     8,454  

Goodwill

    31,108     31,139  

Intangible assets

    1,906     2,128  

Total assets

  $ 100,861   $ 103,206  

LIABILITIES AND STOCKHOLDERS' EQUITY

             

Current liabilities:

             

Notes payable and short-term borrowings

  $ 3,509   $ 3,486  

Accounts payable

    14,873     15,903  

Employee compensation and benefits

    2,900     4,209  

Taxes on earnings

    1,565     1,017  

Deferred revenue

    6,241     6,143  

Accrued restructuring

    559     898  

Other accrued liabilities

    12,882     12,079  

Total current liabilities

    42,529     43,735  

Long-term debt

    15,552     16,039  

Other liabilities

    15,876     16,305  

Commitments and contingencies

             

Stockholders' equity:

             

HP stockholders' equity

             

Preferred stock, $0.01 par value (300 shares authorized; none issued)

         

Common stock, $0.01 par value (9,600 shares authorized; 1,822 and 1,839 shares issued and outstanding at January 31, 2015 and October 31, 2014, respectively)

    18     18  

Additional paid-in capital

    2,538     3,430  

Retained earnings

    29,626     29,164  

Accumulated other comprehensive loss

    (5,675 )   (5,881 )

Total HP stockholders' equity

    26,507     26,731  

Non-controlling interests

    397     396  

Total stockholders' equity

    26,904     27,127  

Total liabilities and stockholders' equity

  $ 100,861   $ 103,206  

   

The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Consolidated Condensed Statements of Cash Flows

(Unaudited)

 
  Three months ended January 31  
 
  2015   2014  
 
  In millions
 

Cash flows from operating activities:

             

Net earnings

  $ 1,366   $ 1,425  

Adjustments to reconcile net earnings to net cash provided by operating activities:

             

Depreciation and amortization

    1,028     1,117  

Stock-based compensation expense

    187     170  

Provision for doubtful accounts

    (2 )   (4 )

Provision for inventory

    64     61  

Restructuring charges

    146     114  

Deferred taxes on earnings

    (173 )   9  

Excess tax benefit from stock-based compensation

    (109 )   (27 )

Other, net

    138     (33 )

Changes in operating assets and liabilities (net of acquisitions):

             

Accounts receivable

    1,540     2,391  

Financing receivables

    222     296  

Inventory

    (224 )   (19 )

Accounts payable

    (852 )   (1,165 )

Taxes on earnings

    293     170  

Restructuring

    (483 )   (381 )

Other assets and liabilities

    (2,397 )   (1,134 )

Net cash provided by operating activities

    744     2,990  

Cash flows from investing activities:

             

Investment in property, plant and equipment

    (947 )   (997 )

Proceeds from sale of property, plant and equipment

    130     450  

Purchases of available-for-sale securities and other investments

    (50 )   (135 )

Maturities and sales of available-for-sale securities and other investments

    30     465  

Payments made in connection with business acquisitions

    (1 )    

Net cash used in investing activities

    (838 )   (217 )

Cash flows from financing activities:

             

Short-term borrowings with original maturities less than 90 days, net

    77     2  

Issuance of debt

    299     2,005  

Payment of debt

    (911 )   (45 )

Issuance of common stock under employee stock plans

    181     83  

Repurchase of common stock

    (1,571 )   (565 )

Excess tax benefit from stock-based compensation

    109     27  

Cash dividends paid

    (304 )   (278 )

Net cash (used in) provided by financing activities

    (2,120 )   1,229  

Net (decrease) increase in cash and cash equivalents

    (2,214 )   4,002  

Cash and cash equivalents at beginning of period

    15,133     12,163  

Cash and cash equivalents at end of period

  $ 12,919   $ 16,165  

Supplemental schedule of non-cash investing and financing activities:

             

Purchase of assets under capital leases

  $   $ 95  

   

The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements

(Unaudited)

Note 1: Basis of Presentation

        In the opinion of management, the accompanying unaudited Consolidated Condensed Financial Statements of Hewlett-Packard Company and its consolidated subsidiaries ("HP") contain all adjustments, including normal recurring adjustments, necessary to present fairly HP's financial position as of January 31, 2015 and October 31, 2014 and its results of operations and cash flows for the three months ended January 31, 2015 and January 31, 2014.

        The results of operations and cash flows for the three months ended January 31, 2015 are not necessarily indicative of the results to be expected for the full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with HP's Annual Report on Form 10-K for the fiscal year ended October 31, 2014, including "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Quantitative and Qualitative Disclosures About Market Risk" and the Consolidated Financial Statements and notes thereto included in Items 7, 7A and 8, respectively, included therein.

Principles of Consolidation

        The accompanying unaudited Consolidated Condensed Financial Statements include the accounts of HP and other subsidiaries and affiliates in which HP has a controlling financial interest or is the primary beneficiary. HP accounts for investments in companies over which HP has the ability to exercise significant influence but does not hold a controlling interest under the equity method, and HP records its proportionate share of income or losses in Interest and other, net in the Consolidated Condensed Statements of Earnings. HP presents non-controlling interests as a separate component within Total stockholder's equity in the Consolidated Condensed Balance Sheets. Net earnings attributable to the non-controlling interests are eliminated within Interest and other, net in the Consolidated Condensed Statements of Earnings and are not presented separately as they were not material for any period presented. HP has eliminated all intercompany accounts and transactions.

Reclassifications

        HP has implemented certain segment and business unit realignments in order to align its segment financial reporting more closely with its current business structure. Reclassifications of certain prior-year segment and business unit financial information have been made to conform to the current-year presentation. None of the changes impacts HP's previously reported consolidated net revenue, earnings from operations, net earnings or net earnings per share ("EPS"). See Note 2 for a further discussion of HP's segment realignment.

Use of Estimates

        The preparation of financial statements in accordance with United States ("U.S.") generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the amounts reported in HP's Consolidated Condensed Financial Statements and accompanying notes. Actual results could differ materially from those estimates.

Subsequent Event

        On March 2, 2015, HP announced it has entered into a definitive agreement to acquire Aruba Networks Inc. ("Aruba"), a leading provider of next-generation network access solutions for the mobile enterprise, for $24.67 per share in cash. The equity value of the transaction is approximately $3.0

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 1: Basis of Presentation (Continued)

billion, and net of cash and debt is approximately $2.7 billion. Both companies' boards of directors have approved the transaction. This acquisition will be integrated into HP's Networking business unit within the Enterprise Group ("EG") segment. The transaction is expected to close in the second half of HP's fiscal 2015, subject to approval by Aruba's stockholders, regulatory approvals in the US and other countries as well as other customary closing conditions.

Accounting Pronouncements

        In May 2014, the Financial Accounting Standards Board ("FASB") amended the existing accounting standards for revenue recognition. The amendments are based on the principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. HP is required to adopt the amendments in the first quarter of fiscal 2018. Early adoption is not permitted. The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. HP is currently evaluating the impact of these amendments and the transition alternatives on its Consolidated Condensed Financial Statements.

Note 2: Segment Information

        HP is a leading global provider of products, technologies, software, solutions and services to individual consumers, small- and medium-sized businesses ("SMBs") and large enterprises, including customers in the government, health and education sectors. HP's offerings span the following:

    personal computing and other access devices;

    imaging- and printing-related products and services;

    enterprise information technology ("IT") infrastructure, including enterprise server and storage technology, networking products and solutions, and technology support and maintenance;

    multi-vendor customer services, including technology consulting, outsourcing and support services across infrastructure, applications and business process domains; and

    software, products and solutions, including application testing and delivery, big data analytics, enterprise security, information governance, IT operations management, and marketing optimization.

        HP's operations are organized into seven segments for financial reporting purposes: Personal Systems, Printing, EG, Enterprise Services ("ES"), Software, HP Financial Services ("HPFS") and Corporate Investments. HP's organizational structure is based on a number of factors that management uses to evaluate, view and run its business operations, which include, but are not limited to, customer base and homogeneity of products and technology. The segments are based on this organizational structure and information reviewed by HP's management to evaluate segment results.

        The Personal Systems segment and the Printing segment are structured beneath a broader Printing and Personal Systems Group ("PPS"). While PPS is not a reportable segment, HP may provide financial data aggregating the Personal Systems and the Printing segments in order to provide a supplementary view of its business.

        A summary description of each segment follows.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 2: Segment Information (Continued)

        The Printing and Personal Systems Group's mission is to leverage the respective strengths of the Personal Systems business and the Printing business by creating a unified organization that is customer-focused and poised to capitalize on rapidly shifting industry trends. Each of the segments within PPS is described below.

        Personal Systems provides commercial personal computers ("PCs"), consumer PCs, workstations, thin clients, tablets, retail point-of-sale systems, calculators and other related accessories, software, support and services for the commercial and consumer markets. HP groups commercial notebooks, commercial desktops, commercial tablets, workstations and thin clients into commercial clients and consumer notebooks, consumer desktops and consumer tablets into consumer clients when describing performance in these markets. Described below are HP's global business capabilities within Personal Systems.

    Commercial PCs are optimized for use by customers, including enterprise and SMB customers, and for connectivity, reliability and manageability in networked environments.

    Consumer PCs include the HP Spectre, HP ENVY, HP Pavilion, HP Chromebook, HP Split, HP Slate and HP Stream series of multi-media consumer notebooks, consumer tablets, hybrids and desktops.

        Printing provides consumer and commercial printer hardware, supplies, media, software and services, as well as scanning devices. Printing is also focused on imaging solutions in the commercial markets. HP groups LaserJet, large format printers and commercial inkjet printers into Commercial Hardware and consumer inkjet printers into Consumer Hardware when describing performance in these markets. Described below are HP's global business capabilities within Printing.

    LaserJet and Enterprise Solutions deliver HP's LaserJet and enterprise products, services and solutions to the SMB and enterprise segments. Managed Print Services provides printing equipment, supplies, support, workflow optimization and security services for SMB and enterprise customers around the world, utilizing proprietary HP tools and fleet management solutions as well as third-party software.

    Inkjet and Printing Solutions deliver HP's consumer and SMB inkjet solutions (hardware, supplies, media, and web-connected hardware and services). Ongoing initiatives and programs such as Ink in the Office and Ink Advantage and newer initiatives such as Instant Ink provide innovative printing solutions to consumers and SMBs.

    Graphics Solutions deliver large format printers (Designjet, Large Format Production, and Scitex Industrial), specialty printing, digital press solutions (Indigo and Inkjet Webpress), supplies and services to print service providers and design and rendering customers.

    Software and Web Services delivers a suite of solutions and services, including photo-storage, printing offerings such as Snapfish and web-connected printing services.

        The Enterprise Group provides servers, storage, networking and technology services that, when combined with HP's Cloud solutions, enable customers to manage applications across public cloud, virtual private cloud, private cloud and traditional IT environments. Described below are HP's business units and capabilities within EG.

    Industry Standard Servers offers a range of products from entry-level servers through premium ProLiant servers, which run primarily Windows, Linux and virtualization platforms from software

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 2: Segment Information (Continued)

      providers such as Microsoft Corporation ("Microsoft") and VMware, Inc. ("VMware") and open sourced software from other major vendors while leveraging x86 processors from Intel Corporation ("Intel") and Advanced Micro Devices, Inc. ("AMD").

    Business Critical Systems offers HP Integrity servers based on the Intel® Itanium® processor, HP Integrity NonStop solutions and mission-critical x86 ProLiant servers.

    Storage offers traditional storage and Converged Storage solutions. Traditional storage includes tape, storage networking and legacy external disk products such as EVA and XP. Converged Storage solutions include 3PAR StoreServ, StoreOnce and StoreVirtual products.

    Networking offers switches, routers, wireless local area network and network management products that span the data center, campus and branch environments and deliver software-defined networking and unified communications capabilities.

    Technology Services provides support services and technology consulting optimizing EG's hardware platforms, and focuses on cloud, mobility and big data. These services are available in the form of service contracts, pre-packaged offerings or on a customized basis.

        Enterprise Services provides technology consulting, outsourcing and support services across infrastructure, applications and business process domains. ES is comprised of the Infrastructure Technology Outsourcing ("ITO") and the Application and Business Services ("ABS") business units.

    Infrastructure Technology Outsourcing delivers comprehensive services that encompass the management of data centers, IT security, cloud computing, workplace technology, networks, unified communications and enterprise service management.

    Application and Business Services helps clients develop, revitalize and manage their applications and information assets.

        Software provides application testing and delivery, big data analytics, enterprise security, information governance, IT operations management, and marketing optimization solutions for businesses and enterprises of all sizes. Our software offerings include licenses, support, professional services and software-as-a-service ("SaaS").

        HP Financial Services provides flexible investment solutions, such as leasing, financing, utility programs and asset management services, for customers to enable the creation of unique technology deployment models and acquire complete IT solutions, including hardware, software and services from HP and others. Providing flexible services and capabilities that support the entire IT lifecycle, HPFS partners with customers globally to help build investment strategies that enhance their business agility and support their business transformation. HPFS offers a wide selection of investment solution capabilities for large enterprise customers and channel partners, along with an array of financial options to SMBs and educational and governmental entities.

        Corporate Investments includes HP Labs and certain cloud-related business incubation projects amongst others.

Segment Policy

        HP derives the results of the business segments directly from its internal management reporting system. The accounting policies HP uses to derive segment results are substantially the same as those the consolidated company uses. Management measures the performance of each segment based on

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 2: Segment Information (Continued)

several metrics, including earnings from operations. Management uses these results, in part, to evaluate the performance of, and to allocate resources to, each of the segments.

        Segment revenue includes revenues from sales to external customers and intersegment revenues that reflect transactions between the segments on an arm's-length basis. Intersegment revenues primarily consist of sales of hardware and software that are sourced internally and, in the majority of the cases, are financed as operating leases by HPFS. HP's consolidated net revenue is derived and reported after the elimination of intersegment revenues from such arrangements.

        HP periodically engages in intercompany advanced royalty payment and licensing arrangements that may result in advance payments between subsidiaries. Revenues from these intercompany arrangements are deferred and recognized as earned over the term of the arrangement by the HP legal entities involved in such transactions; however, these advanced payments are eliminated from revenues as reported by HP and its business segments. As disclosed in Note 6, in the first quarter of fiscal 2015, HP executed an intercompany advanced royalty payment arrangement resulting in advanced payments of $8.2 billion, while during fiscal 2014 HP executed a multi-year intercompany licensing arrangement and intercompany advanced royalty payment arrangement which resulted in combined advanced payments of $11.5 billion. In these transactions, the payments were received in the U.S. from a foreign consolidated affiliate, with a deferral of intercompany revenues over the term of the arrangements, approximately 5 years and 15 years, respectively. The impact of these intercompany arrangements is eliminated from both HP consolidated and segment revenues.

        Financing interest in the Consolidated Condensed Statements of Earnings reflects interest expense on debt attributable to HPFS. Debt attributable to HPFS consists of intercompany equity that is treated as debt for segment reporting purposes, intercompany debt, and borrowing- and funding-related activity associated with HPFS and its subsidiaries.

        HP does not allocate to its segments certain operating expenses, which it manages at the corporate level. These unallocated costs include certain corporate governance costs, stock-based compensation expense, amortization of intangible assets, restructuring charges, separation costs and acquisition-related charges.

Segment Realignment

        Effective at the beginning of its first quarter of fiscal 2015, HP implemented an organizational change to align its segment financial reporting more closely with its current business structure. This organizational change resulted in the transfer of third-party multi-vendor support arrangements from the Technology Services ("TS") business unit within the EG segment to the Infrastructure Technology Outsourcing business unit within the ES segment.

        HP has reflected this change to its segment information retrospectively to the earliest period presented, which has resulted in the removal of intersegment revenue from the Technology Services business unit within the EG segment and the related corporate intersegment revenue eliminations, and the transfer of operating profit from the TS business unit within the EG segment to the Infrastructure Technology Outsourcing business unit within the ES segment. This change had no impact on HP's previously reported consolidated net revenue, earnings from operations, net earnings or net earnings per share.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 2: Segment Information (Continued)

        There have been no material changes to the total assets of HP's individual segments since October 31, 2014.

Segment Operating Results

 
  Personal Systems
and Printing
Group
   
   
   
   
   
   
 
 
  Personal
Systems
  Printing   Enterprise
Group
  Enterprise
Services
  Software   HP
Financial
Services
  Corporate
Investments
  Total  
 
  In millions
 

Three months ended January 31, 2015

                                                 

Net revenue

  $ 8,286   $ 5,485   $ 6,680   $ 4,780   $ 811   $ 781   $ 16   $ 26,839  

Intersegment net revenue and other

    258     58     301     213     60     22         912  

Total segment net revenue

  $ 8,544   $ 5,543   $ 6,981   $ 4,993   $ 871   $ 803   $ 16   $ 27,751  

Earnings from operations

  $ 313   $ 1,067   $ 1,090   $ 148   $ 157   $ 90   $ (124 ) $ 2,741  

Three months ended January 31, 2014

                                                 

Net revenue

  $ 8,310   $ 5,782   $ 6,791   $ 5,283   $ 846   $ 854   $ 288   $ 28,154  

Intersegment net revenue and other

    220     33     179     312     70     16         830  

Total segment net revenue

  $ 8,530   $ 5,815   $ 6,970   $ 5,595   $ 916   $ 870   $ 288   $ 28,984  

Earnings from operations

  $ 279   $ 979   $ 1,003   $ 60   $ 145   $ 101   $ 121   $ 2,688  

        The reconciliation of segment operating results to HP consolidated results was as follows:

 
  Three months ended
January 31
 
 
  2015   2014  
 
  In millions
 

Net Revenue:

             

Total segments

  $ 27,751   $ 28,984  

Elimination of intersegment net revenue and other

    (912 )   (830 )

Total HP consolidated net revenue

  $ 26,839   $ 28,154  

Earnings before taxes:

             

Total segment earnings from operations

  $ 2,741   $ 2,688  

Corporate and unallocated costs and eliminations

    (182 )   (121 )

Stock-based compensation expense

    (187 )   (170 )

Amortization of intangible assets

    (222 )   (283 )

Restructuring charges

    (146 )   (114 )

Acquisition-related charges

    (4 )   (3 )

Separation costs

    (80 )    

Interest and other, net

    (174 )   (163 )

Total HP consolidated earnings before taxes

  $ 1,746   $ 1,834  

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 2: Segment Information (Continued)

        Net revenue by segment and business unit was as follows:

 
  Three months ended
January 31
 
 
  2015   2014  
 
  In millions
 

Notebooks

  $ 4,724   $ 4,335  

Desktops

    2,949     3,274  

Workstations

    526     533  

Other

    345     388  

Personal Systems

    8,544     8,530  

Supplies

    3,601     3,795  

Commercial Hardware

    1,316     1,347  

Consumer Hardware

    626     673  

Printing

    5,543     5,815  

Total Printing and Personal Systems Group

    14,087     14,345  

Industry Standard Servers

    3,387     3,178  

Technology Services

    1,987     2,100  

Storage

    837     834  

Networking

    562     630  

Business Critical Systems

    208     228  

Enterprise Group

    6,981     6,970  

Infrastructure Technology Outsourcing

    3,132     3,501  

Application and Business Services

    1,861     2,094  

Enterprise Services

    4,993     5,595  

Software

    871     916  

HP Financial Services

    803     870  

Corporate Investments

    16     288  

Total segment net revenue

    27,751     28,984  

Eliminations of intersegment net revenue and other

    (912 )   (830 )

Total net revenue

  $ 26,839   $ 28,154  

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 3: Restructuring

    Summary of Restructuring Plans

        HP's restructuring activities summarized by plan were as follows:

 
   
  Three months ended
January 31, 2015
   
  As of
January 31, 2015
 
 
  Balance,
October 31,
2014
  Charges   Cash
Payments
  Other
Adjustments
and Non-Cash
Settlements
  Balance,
January 31,
2015
  Total
Costs
Incurred
to Date
  Total
Expected
Costs to Be
Incurred
 
 
  In millions
 

Fiscal 2012 Plan

                                           

Severance and EER

  $ 955   $ 133   $ (439 ) $ (45 ) $ 604   $ 4,526   $ 5,000  

Infrastructure and other

    98     17     (39 )   (3 )   73     532     540  

Total 2012 Plan

    1,053     150     (478 )   (48 )   677     5,058     5,540  

Other Plans:

                                           

Severance

    7             (1 )   6     2,629     2,629  

Infrastructure

    54     (4 )   (5 )   (1 )   44     1,429     1,433  

Total Other Plans

    61     (4 )   (5 )   (2 )   50     4,058     4,062  

Total restructuring plans

  $ 1,114   $ 146   $ (483 ) $ (50 ) $ 727   $ 9,116   $ 9,602  

Reflected in Consolidated Balance Sheets:

                                           

Accrued restructuring

  $ 898                     $ 559              

Other liabilities

  $ 216                     $ 168              

    Fiscal 2012 Restructuring Plan

        On May 23, 2012, HP adopted a multi-year restructuring plan (the "2012 Plan") designed to simplify business processes, accelerate innovation and deliver better results for customers, employees and stockholders. HP estimates that it will eliminate approximately 55,000 positions in connection with the 2012 Plan through fiscal 2015, with a portion of those employees exiting the company as part of voluntary enhanced early retirement ("EER") programs in the United States and in certain other countries. As of October 31, 2014 HP estimated that it will recognize approximately $5.5 billion in aggregate charges in connection with the 2012 Plan. HP expects approximately $5.0 billion to relate to workforce reductions, including the EER programs, and approximately $0.5 billion to relate to infrastructure, including data center and real estate consolidation, and other items. As of January 31, 2015, HP had recorded $5.1 billion in aggregate charges of which $4.5 billion related to workforce reductions and $532 million related to infrastructure, including data center and real estate consolidation, and other items. HP expects to record the remaining charges through the end of HP's 2015 fiscal year as the accounting recognition criteria are met. As of January 31, 2015, HP had eliminated approximately 43,700 positions for which a severance payment has been or will be made as part of the 2012 Plan. The severance- and infrastructure-related cash payments associated with the 2012 Plan are expected to be paid out through fiscal 2021.

    Other Plans

        Restructuring plans initiated by HP in fiscal 2008 and 2010 were substantially completed as of January 31, 2015. Severance- and infrastructure-related cash payments associated with the other plans are expected to be paid out through fiscal 2019.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 4: Retirement and Post-Retirement Benefit Plans

        HP's net pension and post-retirement benefit (credit) cost recognized in the Consolidated Condensed Statements of Earnings was as follows:

 
  Three months ended January 31  
 
  U.S.
Defined
Benefit Plans
  Non-U.S.
Defined
Benefit Plans
  Post-
Retirement
Benefit Plans
 
 
  2015   2014   2015   2014   2015   2014  
 
  In millions
 

Service cost

  $   $   $ 86   $ 78   $ 1   $ 1  

Interest cost

    143     142     163     183     7     8  

Expected return on plan assets

    (217 )   (203 )   (305 )   (282 )   (9 )   (8 )

Amortization and deferrals:

                                     

Actuarial loss (gain)

    13     4     112     78     (3 )   (3 )

Prior service benefit

            (5 )   (6 )   (5 )   (10 )

Net periodic benefit (credit) cost

    (61 )   (57 )   51     51     (9 )   (12 )

Special termination benefits

            6     6         (11 )

Net benefit (credit) cost

  $ (61 ) $ (57 ) $ 57   $ 57   $ (9 ) $ (23 )

Employer Contributions and Funding Policy

        HP's policy is to fund its pension plans so that it makes at least the minimum contribution required by local government, funding and taxing authorities.

        HP previously disclosed in its Consolidated Financial Statements for the fiscal year ended October 31, 2014 that it expected to contribute approximately $686 million in fiscal 2015 to its non-U.S. pension plans and expected to pay approximately $35 million to cover benefit payments to U.S. non-qualified plan participants. HP expected to pay approximately $47 million to cover benefit claims for HP's post-retirement benefit plans.

        During the three months ended January 31, 2015, HP contributed $54 million to its non-U.S. pension plans, paid $8 million to cover benefit payments to U.S. non-qualified plan participants, and paid $12 million to cover benefit claims under HP's post-retirement benefit plans. During the remainder of fiscal 2015, HP anticipates making additional contributions of approximately $632 million to its non-U.S. pension plans and approximately $27 million to its U.S. non-qualified plan participants and expects to pay approximately $35 million to cover benefit claims under HP's post-retirement benefit plans.

        HP's pension and other post-retirement benefit costs and obligations depend on various assumptions. Differences between expected and actual returns on investments and changes in discount rates and other actuarial assumptions are reflected as unrecognized gains or losses, and such gains or losses are amortized to earnings in future periods. A deterioration in the funded status of a plan could result in a need for additional company contributions or an increase in net pension and post-retirement benefit costs in future periods. Actuarial gains or losses are determined at the measurement date and

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 4: Retirement and Post-Retirement Benefit Plans (Continued)

amortized over the remaining service life for active plans or the life expectancy of plan participants for frozen plans.

Note 5: Stock-Based Compensation

        HP's stock-based compensation plans include HP's principal equity plans as well as various equity plans assumed through business combinations. HP's principal equity plans permit the issuance of restricted stock awards, stock options and performance-based awards.

        Stock-based compensation expense and the resulting tax benefits were as follows:

 
  Three months ended January 31  
 
  2015   2014  
 
  In millions
 

Stock-based compensation expense

  $ 187   $ 170  

Income tax benefit

    (60 )   (53 )

Stock-based compensation expense, net of tax

  $ 127   $ 117  

    Restricted Stock Awards

        Restricted stock awards are non-vested stock awards that may include grants of restricted stock or restricted stock units. For the three months ended January 31, 2015, HP granted only restricted stock units.

        A summary of restricted stock award activity is as follows:

 
  Three months ended
January 31, 2015
 
 
  Shares   Weighted-
Average
Grant Date
Fair Value
Per Share
 
 
  In thousands
   
 

Outstanding at beginning of period

    40,808   $ 24  

Granted

    14,738   $ 37  

Vested

    (15,749 ) $ 23  

Forfeited

    (733 ) $ 25  

Outstanding at end of period

    39,064   $ 30  

        At January 31, 2015, there was $852 million of unrecognized pre-tax stock-based compensation expense related to non-vested restricted stock awards, which HP expects to recognize over the remaining weighted-average vesting period of 1.6 years.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 5: Stock-Based Compensation (Continued)

    Stock Options

        HP utilizes the Black-Scholes-Merton option pricing formula to estimate the fair value of stock options subject to service-based vesting conditions. HP estimates the fair value of stock options subject to performance-contingent vesting conditions using a combination of a Monte Carlo simulation model and a lattice model, as these awards contain market conditions. The weighted-average fair value and the assumptions used to measure fair value were as follows:

 
  Three months
ended
January 31
 
 
  2015   2014  

Weighted-average fair value of grants per option(1)

  $ 8.04   $ 7.45  

Expected volatility(2)

    26.3 %   33.6 %

Risk-free interest rate(3)

    1.7 %   1.8 %

Expected dividend yield(4)

    1.7 %   2.2 %

Expected term in years(5)

    5.8     5.7  

(1)
The weighted-average fair value was based on stock options granted during the period.

(2)
For all awards granted in fiscal 2015, expected volatility was estimated using the implied volatility derived from options traded on HP's common stock. For awards granted in fiscal 2014, expected volatility for awards subject to service-based vesting was estimated using the implied volatility derived from options traded on HP's common stock, whereas for performance-contingent awards, expected volatility was estimated using the historical volatility of HP's common stock.

(3)
The risk-free interest rate was estimated based on the yield on U.S. Treasury zero-coupon issues.

(4)
The expected dividend yield represents a constant dividend yield applied for the duration of the expected term of the award.

(5)
For awards subject to service-based vesting, the expected term was estimated using historical exercise and post-vesting termination patterns; and for performance-contingent awards, the expected term represents an output from the lattice model.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 5: Stock-Based Compensation (Continued)

        A summary of stock option activity is as follows:

 
  Three months ended January 31, 2015  
 
  Shares   Weighted-
Average
Exercise
Price
  Weighted-
Average
Remaining
Contractual
Term
  Aggregate
Intrinsic
Value
 
 
  In thousands
   
  In years
  In millions
 

Outstanding at beginning of period

    57,853   $ 27              

Granted

    7,869   $ 37              

Exercised

    (6,977 ) $ 20              

Forfeited/cancelled/expired

    (14,375 ) $ 41              

Outstanding at end of period

    44,370   $ 25     5.6   $ 514  

Vested and expected to vest at end of period

    40,827   $ 25     5.5   $ 478  

Exercisable at end of period

    20,921   $ 24     4.5   $ 278  

        The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value that option holders would have realized had all option holders exercised their options on the last trading day of the first quarter of fiscal 2015. The aggregate intrinsic value is the difference between HP's closing stock price on the last trading day of the first quarter of fiscal 2015 and the exercise price, multiplied by the number of in-the-money options. The total intrinsic value of options exercised for the three months ended January 31, 2015 was $134 million.

        At January 31, 2015, there was $90 million of unrecognized pre-tax, stock-based compensation expense related to unvested stock options, which HP expects to recognize over the remaining weighted-average vesting period of 2.2 years.

Note 6: Taxes on Earnings

    Provision for Taxes

        HP's effective tax rate was 21.8% and 22.3% for the three months ended January 31, 2015 and 2014, respectively. HP's effective tax rate generally differs from the U.S. federal statutory rate of 35% due to favorable tax rates associated with certain earnings from HP's operations in lower-tax jurisdictions throughout the world. HP has not provided U.S. taxes for all foreign earnings because HP plans to reinvest some of those earnings indefinitely outside the U.S.

        In the three months ended January 31, 2015, HP recorded $81 million of net tax benefits related to discrete items. These amounts included a tax benefit of $47 million arising from the retroactive research and development credit provided by the Tax Increase Prevention Act of 2014 signed into law in December 2014, a tax benefit of $29 million on separation charges and a tax benefit of $21 million on restructuring charges. These tax benefits were partially offset by various tax charges of $16 million.

        In the three months ended January 31, 2014, HP recorded $22 million of net tax charges related to discrete items. These amounts included $37 million of various tax charges and $15 million of tax benefits on restructuring charges.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 6: Taxes on Earnings (Continued)

    Uncertain Tax Positions

        HP is subject to income tax in the U.S. and approximately 105 other countries and is subject to routine corporate income tax audits in many of these jurisdictions. In addition, HP is subject to numerous ongoing audits by federal, state and foreign tax authorities. The IRS is conducting an audit of HP's 2009, 2010 and 2011 income tax returns. HP has received from the IRS Notices of Deficiency for its fiscal 1999, 2000, 2003, 2004 and 2005 tax years, and Revenue Agent's Reports ("RAR") for its fiscal 2001, 2002, 2006, 2007 and 2008 tax years. In addition, HP expects the IRS to issue an RAR for 2009 relating to certain tax positions taken on the filed tax returns, including matters related to the U.S. taxation of certain intercompany loans. While the RAR may be material in amount, HP believes it has valid positions supporting its tax returns and, if necessary, it will rigorously defend such matters.

        With respect to major foreign and state tax jurisdictions, HP is no longer subject to tax authority examinations for years prior to 1999. HP is subject to a foreign tax audit concerning an intercompany transaction for fiscal 2009. The relevant taxing authority has proposed an assessment of approximately $680 million. HP is contesting this proposed assessment.

        HP believes it has provided adequate reserves for all tax deficiencies or reductions in tax benefits that could result from federal, state and foreign tax audits. HP regularly assesses the likely outcomes of these audits in order to determine the appropriateness of HP's tax provision. HP adjusts its uncertain tax positions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular audit. However, income tax audits are inherently unpredictable and there can be no assurance that HP will accurately predict the outcome of these audits. The amounts ultimately paid on resolution of an audit could be materially different from the amounts previously included in the Provision for taxes and therefore the resolution of one or more of these uncertainties in any particular period could have a material impact on net income or cash flows.

        As of January 31, 2015, the amount of unrecognized tax benefits was $4.2 billion, of which up to $2.3 billion would affect HP's effective tax rate if realized. HP recognizes interest income from favorable settlements and interest expense and penalties accrued on unrecognized tax benefits in Provision for taxes in the Consolidated Condensed Statements of Earnings. As of January 31, 2015, HP had accrued $244 million for interest and penalties.

        HP engages in continuous discussion and negotiation with taxing authorities regarding tax matters in various jurisdictions. HP does not expect complete resolution of any U.S. Internal Revenue Service ("IRS") audit cycle within the next 12 months. However, it is reasonably possible that certain federal, foreign and state tax issues may be concluded in the next 12 months, including issues involving transfer pricing and other matters. Accordingly, HP believes it is reasonably possible that its existing unrecognized tax benefits may be reduced by an amount up to $1.5 billion within the next 12 months.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 6: Taxes on Earnings (Continued)

    Deferred Tax Assets and Liabilities

        Current and long-term deferred tax assets and liabilities are presented in the Consolidated Condensed Balance Sheets as follows:

 
  As of  
 
  January 31,
2015
  October 31,
2014
 
 
  In millions
 

Current deferred tax assets

  $ 3,093   $ 2,754  

Current deferred tax liabilities

    (401 )   (284 )

Long-term deferred tax assets

    953     740  

Long-term deferred tax liabilities

    (1,594 )   (1,124 )

Net deferred tax assets net of deferred tax liabilities

  $ 2,051   $ 2,086  

        HP periodically engages in intercompany advanced royalty payment and licensing arrangements that may result in advance payments between subsidiaries in different tax jurisdictions. When the local tax treatment of the intercompany licensing arrangements differs from U.S. GAAP treatment, deferred taxes are recognized. In the first quarter of fiscal 2015, HP executed an intercompany advanced royalty payment arrangement resulting in advanced payments of $8.2 billion, while during fiscal 2014, HP executed a multi-year intercompany licensing arrangement and an intercompany advanced royalty payment arrangement which resulted in combined advanced payments of $11.5 billion, the result of which was the recognition of net U.S. long-term deferred tax assets of $2.1 billion and $1.7 billion in the respective periods. In these transactions, the payments were received in the U.S. from a foreign consolidated affiliate, with a deferral of intercompany revenues over the term of the arrangements, approximately 5 years and 15 years, respectively. Intercompany royalty revenue and the amortization expense related to the licensing rights are eliminated in consolidation.

        Separation costs are expenses associated with HP's plan to separate into two independent publicly-traded companies. These costs include finance, IT, consulting and legal fees, real estate, and other items that are incremental and one-time in nature. HP is recording a deferred tax asset on these costs and expenses as they are incurred through fiscal 2015. We expect a portion of these deferred tax assets associated with separation costs and expenses will be eliminated, as non-deductible expenses, at the time the separation is executed. Furthermore, in future periods we expect to record adjustments to certain deferred tax assets reflecting the impact of separation related activities. HP's results of operations could be materially affected in any particular period by the impact of these matters.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 7: Balance Sheet Details

        Balance sheet details were as follows:

    Accounts Receivable, Net

 
  As of  
 
  January 31,
2015
  October 31,
2014
 
 
  In millions
 

Accounts receivable

  $ 12,513   $ 14,064  

Allowance for doubtful accounts

    (218 )   (232 )

  $ 12,295   $ 13,832  

        The allowance for doubtful accounts related to accounts receivable and changes were as follows:

 
  Three months ended
January 31, 2015
 
 
  In millions
 

Balance at beginning of period

  $ 232  

Provision for doubtful accounts, net of recoveries

    (3 )

Deductions

    (11 )

Balance at end of period

  $ 218  

        HP has third-party revolving short-term financing arrangements intended to facilitate the working capital requirements of certain customers. The maximum, utilized and available program capacity under these revolving short-term financing arrangements was as follows:

 
  As of  
 
  January 31,
2015
  October 31,
2014
 
 
  In millions
 

Non-recourse arrangements:

             

Maximum program capacity

  $ 1,045   $ 1,083  

Utilized capacity(1)(2)

    (406 )   (613 )

Available capacity

  $ 639   $ 470  

Partial-recourse arrangements:

             

Maximum program capacity

  $ 1,769   $ 1,877  

Utilized capacity(1)(2)

    (1,337 )   (1,500 )

Available capacity

  $ 432   $ 377  

Total arrangements:

             

Maximum program capacity

  $ 2,814   $ 2,960  

Utilized capacity(1)(2)

    (1,743 )   (2,113 )

Available capacity

  $ 1,071   $ 847  

(1)
Utilized capacity represents the receivables sold to third parties, but not collected from the customer by the third parties.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 7: Balance Sheet Details (Continued)

(2)
HP reflects the amounts transferred to but not yet collected from third parties in accounts receivable in the Consolidated Condensed Balance Sheets. These amounts, included in the utilized capacity are as follows:

 
  As of  
 
  January 31,
2015
  October 31,
2014
 
 
  In millions
 

Non-recourse arrangements

  $ 1   $ 78  

Partial-recourse arrangements

    293     381  

Total arrangements

  $ 294   $ 459  

        The activity related to HP's revolving short-term financing arrangements was as follows:

 
  Three months
ended
January 31, 2015
 
 
  In millions
 

Balance at beginning of period(1)

  $ 459  

Trade receivables sold

    2,760  

Cash receipts

    (2,893 )

Foreign currency and other

    (32 )

Balance at end of period(1)

  $ 294  

(1)
Beginning and ending balance represents amounts for trade receivables sold but not yet collected.

    Inventory

 
  As of  
 
  January 31,
2015
  October 31,
2014
 
 
  In millions
 

Finished goods

  $ 4,103   $ 3,973  

Purchased parts and fabricated assemblies

    2,472     2,442  

  $ 6,575   $ 6,415  

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 7: Balance Sheet Details (Continued)

    Property, Plant and Equipment

 
  As of  
 
  January 31,
2015
  October 31,
2014
 
 
  In millions
 

Land

  $ 540   $ 540  

Buildings and leasehold improvements

    9,068     9,048  

Machinery and equipment, including equipment held for lease

    15,959     16,664  

    25,567     26,252  

Accumulated depreciation

    (14,537 )   (14,912 )

  $ 11,030   $ 11,340  

        For the three months ended January 31, 2015, the change in gross property, plant and equipment was due primarily to purchases of $0.8 billion, which were partially offset by sales and retirements totaling $1.0 billion and unfavorable currency impacts of $0.3 billion. Accumulated depreciation associated with the assets sold and retired was $0.9 billion.

Note 8: Financing Receivables and Operating Leases

        Financing receivables represent sales-type and direct-financing leases of HP and third-party products. These receivables typically have terms ranging from two to five years and are usually collateralized by a security interest in the underlying assets. Financing receivables also include billed receivables from operating leases. The components of financing receivables were as follows:

 
  As of  
 
  January 31,
2015
  October 31,
2014
 
 
  In millions
 

Minimum lease payments receivable

  $ 6,729   $ 6,982  

Unguaranteed residual value

    229     235  

Unearned income

    (528 )   (547 )

Financing receivables, gross

    6,430     6,670  

Allowance for doubtful accounts

    (102 )   (111 )

Financing receivables, net

    6,328     6,559  

Less: current portion(1)

    (2,907 )   (2,946 )

Amounts due after one year, net(1)

  $ 3,421   $ 3,613  

(1)
HP includes the current portion in Financing receivables and amounts due after one year, net in Long-term financing receivables and other assets in the accompanying Consolidated Condensed Balance Sheets.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financing Receivables and Operating Leases (Continued)

    Credit Quality Indicators

        Due to the homogenous nature of its leasing transactions, HP manages its financing receivables on an aggregate basis when assessing and monitoring credit risk. Credit risk is generally diversified due to the large number of entities comprising HP's customer base and their dispersion across many different industries and geographic regions. HP evaluates the credit quality of an obligor at lease inception and monitors that credit quality over the term of a transaction. HP assigns risk ratings to each lease based on the creditworthiness of the obligor and other variables that augment or mitigate the inherent credit risk of a particular transaction. Such variables include the underlying value and liquidity of the collateral, the essential use of the equipment, the term of the lease and the inclusion of credit enhancements, such as guarantees, letters of credit or security deposits.

        The credit risk profile of gross financing receivables, based on internally assigned ratings, was as follows:

 
  As of  
 
  January 31,
2015
  October 31,
2014
 
 
  In millions
 

Risk Rating:

             

Low

  $ 3,374   $ 3,536  

Moderate

    2,967     3,022  

High

    89     112  

Total

  $ 6,430   $ 6,670  

        Accounts rated low risk typically have the equivalent of a Standard & Poor's rating of BBB– or higher, while accounts rated moderate risk generally have the equivalent of BB+ or lower. HP classifies accounts as high risk when it considers the financing receivable to be impaired or when management believes there is a significant near-term risk of impairment.

    Allowance for Doubtful Accounts

        The allowance for doubtful accounts for financing receivables is comprised of a general reserve and a specific reserve. HP maintains general reserve percentages on a regional basis and bases such percentages on several factors, including consideration of historical credit losses and portfolio delinquencies, trends in the overall weighted-average risk rating of the portfolio, current economic conditions and information derived from competitive benchmarking. HP excludes accounts evaluated as part of the specific reserve from the general reserve analysis. HP establishes a specific reserve for financing receivables with identified exposures, such as customer defaults, bankruptcy or other events, that make it unlikely HP will recover its investment. For individually evaluated receivables, HP determines the expected cash flow for the receivable, which includes consideration of estimated proceeds from disposition of the collateral, and calculates an estimate of the potential loss and the probability of loss. For those accounts where a loss is considered probable, HP records a specific reserve. HP generally writes off a receivable or records a specific reserve when a receivable becomes 180 days past due, or sooner if HP determines that the receivable is not collectible.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financing Receivables and Operating Leases (Continued)

        The allowance for doubtful accounts related to financing receivables and changes were as follows:

 
  Three months ended
January 31, 2015
 
 
  In millions
 

Balance at beginning of period

  $ 111  

Provision for doubtful accounts

    1  

Deductions, net of recoveries

    (10 )

Balance at end of period

  $ 102  

        The gross financing receivables and related allowance evaluated for loss were as follows:

 
  As of  
 
  January 31,
2015
  October 31,
2014
 
 
  In millions
 

Gross financing receivables collectively evaluated for loss

  $ 6,143   $ 6,378  

Gross financing receivables individually evaluated for loss

    287     292  

Total

  $ 6,430   $ 6,670  

Allowance for financing receivables collectively evaluated for loss

  $ 82   $ 92  

Allowance for financing receivables individually evaluated for loss

    20     19  

Total

  $ 102   $ 111  

    Non-Accrual and Past-Due Financing Receivables

        HP considers a financing receivable to be past due when the minimum payment is not received by the contractually specified due date. HP generally places financing receivables on non-accrual status, which is suspension of interest accrual, and considers such receivables to be non-performing at the earlier of the time at which full payment of principal and interest becomes doubtful or the receivable becomes 90 days past due. Subsequently, HP may recognize revenue on non-accrual financing receivables as payments are received, which is on a cash basis, if HP deems the recorded financing receivable to be fully collectible; however, if there is doubt regarding the ultimate collectability of the recorded financing receivable, all cash receipts are applied to the carrying amount of the financing receivable, which is the cost recovery method. In certain circumstances, such as when HP deems a delinquency to be of an administrative nature, financing receivables may accrue interest after becoming 90 days past due. The non-accrual status of a financing receivable may not impact a customer's risk rating. After all of a customer's delinquent principal and interest balances are settled, HP may return the related financing receivable to accrual status.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financing Receivables and Operating Leases (Continued)

        The following table summarizes the aging and non-accrual status of gross financing receivables:

 
  As of  
 
  January 31,
2015
  October 31,
2014
 
 
  In millions
 

Billed(1):

             

Current 1-30 days

  $ 231   $ 243  

Past due 31-60 days

    44     46  

Past due 61-90 days

    25     12  

Past due >90 days

    54     49  

Unbilled sales-type and direct-financing lease receivables

    6,076     6,320  

Total gross financing receivables

  $ 6,430   $ 6,670  

Gross financing receivables on non-accrual status(2)

  $ 131   $ 130  

Gross financing receivables 90 days past due and still accruing interest(2)

  $ 156   $ 162  

(1)
Includes billed operating lease receivables and billed sales-type and direct-financing lease receivables.

(2)
Includes billed operating lease receivables and billed and unbilled sales-type and direct-financing lease receivables.

    Operating Leases

        Operating lease assets included in machinery and equipment in the Consolidated Condensed Balance Sheets were as follows:

 
  As of  
 
  January 31,
2015
  October 31,
2014
 
 
  In millions
 

Equipment leased to customers

  $ 3,867   $ 3,977  

Accumulated depreciation

    (1,342 )   (1,382 )

  $ 2,525   $ 2,595  

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 9: Goodwill and Intangible Assets

    Goodwill

        Goodwill allocated to HP's reportable segments and changes in the carrying amount of goodwill were as follows:

 
  Three months ended January 31, 2015  
 
  Personal
Systems
  Printing   Enterprise
Group
  Enterprise
Services(2)
  Software   HP
Financial
Services
  Corporate
Investments
  Total  
 
  In millions
 

Balance at beginning of period(1)

  $ 2,588   $ 2,591   $ 16,867   $ 97   $ 8,852   $ 144   $   $ 31,139  

Goodwill adjustments

            (30 )   (1 )               (31 )

Balance at end of period(1)

  $ 2,588   $ 2,591   $ 16,837   $ 96   $ 8,852   $ 144   $   $ 31,108  

(1)
Goodwill at January 31, 2015 and October 31, 2014 is net of accumulated impairment losses of $14.5 billion. Of that amount, $8.0 billion relates to the ES segment, $5.7 billion relates to Software, and the remaining $0.8 billion relates to Corporate Investments.

(2)
Goodwill relates to the MphasiS Limited reporting unit.

        Goodwill is tested for impairment at the reporting unit level. As of January 31, 2015 our reporting units are consistent with the reportable segments identified in Note 2, except for ES, which includes two reporting units: MphasiS Limited; and the remainder of ES.

        HP will continue to evaluate the recoverability of goodwill on an annual basis as of the beginning of its fourth fiscal quarter and whenever events or changes in circumstances indicate there may be a potential impairment.

    Intangible Assets

        HP's intangible assets are composed of:

 
  As of January 31, 2015   As of October 31, 2014  
 
  Gross   Accumulated
Amortization
  Accumulated
Impairment
Loss
  Net   Gross   Accumulated
Amortization
  Accumulated
Impairment
Loss
  Net  
 
  In millions
 

Customer contracts, customer lists and distribution agreements

  $ 5,282   $ (3,361 ) $ (856 ) $ 1,065   $ 5,289   $ (3,228 ) $ (856 ) $ 1,205  

Developed and core technology and patents

    4,244     (1,341 )   (2,138 )   765     4,266     (1,301 )   (2,138 )   827  

Trade name and trade marks

    1,693     (281 )   (1,336 )   76     1,693     (261 )   (1,336 )   96  

Total intangible assets

  $ 11,219   $ (4,983 ) $ (4,330 ) $ 1,906   $ 11,248   $ (4,790 ) $ (4,330 ) $ 2,128  

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 9: Goodwill and Intangible Assets (Continued)

        During the first three months of fiscal 2015, $29 million of intangible assets became fully amortized and have been eliminated from gross intangible assets and accumulated amortization.

        As of January 31, 2015, the estimated future amortization expense related to finite-lived intangible assets was as follows:

Fiscal year:
  In millions  

2015 (remaining 9 months)

  $ 651  

2016

    653  

2017

    244  

2018

    147  

2019

    110  

2020

    97  

Thereafter

    4  

Total

  $ 1,906  

Note 10: Fair Value

        Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.

    Fair Value Hierarchy

        HP uses valuation techniques that are based upon observable and unobservable inputs. Observable inputs are developed using market data such as publicly available information and reflect the assumptions market participants would use, while unobservable inputs are developed using the best information available about the assumptions market participants would use. Assets and liabilities are classified in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement:

        Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities.

        Level 2—Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market-corroborated inputs.

        Level 3—Unobservable inputs for the asset or liability.

        The fair value hierarchy gives the highest priority to observable inputs and lowest priority to unobservable inputs.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 10: Fair Value (Continued)

        The following table presents HP's assets and liabilities that are measured at fair value on a recurring basis:

 
  As of January 31, 2015   As of October 31, 2014  
 
  Fair Value
Measured Using
   
  Fair Value
Measured Using
   
 
 
  Level 1   Level 2   Level 3   Total   Level 1   Level 2   Level 3   Total  
 
  In millions
 

Assets

                                                 

Cash Equivalents and Investments:

                                                 

Time deposits

  $   $ 2,678   $   $ 2,678   $   $ 2,865   $   $ 2,865  

Money market funds

    7,632             7,632     9,857             9,857  

Mutual funds

        260         260         244         244  

Marketable equity securities

    12     95         107     14     5         19  

Foreign bonds

    8     342         350     9     367         376  

Other debt securities

        1     44     45         1     46     47  

Derivatives:

                                                 

Interest rate contracts

        191         191         105         105  

Foreign currency contracts

        1,670     5     1,675         862     6     868  

Other derivatives

        6         6         7         7  

Total assets

  $ 7,652   $ 5,243   $ 49   $ 12,944   $ 9,880   $ 4,456   $ 52   $ 14,388  

Liabilities

                                                 

Derivatives:

                                                 

Interest rate contracts

  $   $   $   $   $   $ 55   $   $ 55  

Foreign currency contracts

        512     2     514         348     2     350  

Total liabilities

  $   $ 512   $ 2   $ 514   $   $ 403   $ 2   $ 405  

        For the three months ended January 31, 2015, the transfers between levels within the fair value hierarchy were not material.

    Valuation Techniques

        Cash Equivalents and Investments: HP holds time deposits, money market funds, mutual funds, other debt securities primarily consisting of corporate and foreign government notes and bonds, and common stock and equivalents. HP values cash equivalents and equity investments using quoted market prices, alternative pricing sources, including net asset value, or models utilizing market observable inputs. The fair value of debt investments was based on quoted market prices or model-driven valuations using inputs primarily derived from or corroborated by observable market data, and, in certain instances, valuation models that utilize assumptions which cannot be corroborated with observable market data.

        Derivative Instruments: HP uses forward contracts, interest rate and total return swaps and option contracts to hedge certain foreign currency and interest rate exposures. HP uses industry standard valuation models to measure fair value. Where applicable, these models project future cash flows and

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 10: Fair Value (Continued)

discount the future amounts to present value using market-based observable inputs, including interest rate curves, HP and counterparty credit risk, foreign currency rates, and forward and spot prices for currencies and interest rates. See Note 11 for a further discussion of HP's use of derivative instruments.

    Other Fair Value Disclosures

        Short- and Long-Term Debt: HP estimates the fair value of its debt primarily using an expected present value technique, which is based on observable market inputs using interest rates currently available to companies of similar credit standing for similar terms and remaining maturities, and considering its own credit risk. The portion of HP's debt that is hedged is reflected in the Consolidated Condensed Balance Sheets as an amount equal to the debt's carrying amount and a fair value adjustment representing changes in the fair value of the hedged debt obligations arising from movements in benchmark interest rates. The estimated fair value of HP's short- and long-term debt was $19.6 billion at January 31, 2015, compared to its carrying amount of $19.1 billion at that date. The estimated fair value of HP's short- and long-term debt was $19.9 billion at October 31, 2014, compared to its carrying amount of $19.5 billion at that date. If measured at fair value in the Consolidated Condensed Balance Sheets, short- and long-term debt would be classified in Level 2 of the fair value hierarchy.

        Other Financial Instruments: For the balance of HP's financial instruments, primarily accounts receivable, accounts payable and financial liabilities included in other accrued liabilities, the carrying amounts approximate fair value due to their short maturities. If measured at fair value in the Consolidated Condensed Balance Sheets, these other financial instruments would be classified in Level 2 or Level 3 of the fair value hierarchy.

        Non-Marketable Equity Investments and Non-Financial Assets: HP's non-marketable equity investments and non-financial assets, such as goodwill, intangible assets and property, plant and equipment, are recorded at fair value in the period an impairment charge is recognized. If measured at fair value in the Consolidated Condensed Balance Sheets, these would generally be classified in Level 3 of the fair value hierarchy.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 11: Financial Instruments

    Cash Equivalents and Available-for-Sale Investments

        Cash equivalents and available-for-sale investments were as follows:

 
  As of January 31, 2015   As of October 31, 2014  
 
  Cost   Gross
Unrealized
Gain
  Gross
Unrealized
Loss
  Fair
Value
  Cost   Gross
Unrealized
Gain
  Gross
Unrealized
Loss
  Fair
Value
 
 
  In millions
 

Cash Equivalents:

                                                 

Time deposits

  $ 2,492   $   $   $ 2,492   $ 2,720   $   $   $ 2,720  

Money market funds

    7,632             7,632     9,857           $ 9,857  

Mutual funds

    121             121     110             110  

Total cash equivalents

    10,245             10,245     12,687             12,687  

Available-for-Sale Investments:

                                                 

Debt securities:

                                                 

Time deposits

    186             186     145             145  

Foreign bonds

    257     93         350     286     90         376  

Other debt securities

    59         (14 )   45     61         (14 )   47  

Total debt securities

    502     93     (14 )   581     492     90     (14 )   568  

Equity securities:

                                                 

Mutual funds

    134     5         139     134             134  

Equity securities in public companies

    58     45         103     8     7         15